FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

(Mark One)
     [xx]  Annual  report  pursuant  to  section  13 or 15(d) of the  Securities
Exchange Act of 1934

For the fiscal year ended December 31, 1997.

     [ ]  Transition  report  pursuant to Section 13 or 15(d) of the  Securities
Exchange Act of 1934

     For   the    transition    period   from    _________________________    to
______________________________

Commission file number 0-18090

                                CAERE CORPORATION
             (Exact name of registrant as specified in the charter:)

                   Delaware                                  94-2250509
    (State or other jurisdiction of                        (I.R.S. Employer
    incorporation or organization)                        Identification No.)

                  100 Cooper Court, Los Gatos, California 95032
                         (Address of principal Offices)

Registrant's telephone number, including area code:  (408) 395-7000

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:
        Common Stock, $0.001 par value
     Preferred Share Purchase Rights

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                    YES   x                      NO

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  Registrant,  based upon the closing sale price of the Common Stock on March
1, 1998, as reported by Nasdaq, was approximately $160,136,000.

     The number of shares of the  Registrant's  Common Stock  outstanding  as of
March 1, 1998, was 13,006,008.

DOCUMENTS INCORPORATED BY REFERENCE

     (1)  Definitive  proxy  statement  filed with the  Securities  and Exchange
Commission  relating to the Company's 1997 Annual Meeting of  Stockholders to be
held May 13, 1998 (Part III of Form 10-K).

     (2) Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1997 (Parts II and IV of Form 10-K).


<PAGE>


                                     PART I

Item 1.  BUSINESS.

         Except for the historical  information  contained herein, the following
discussion   contains   forward-looking   statements   that  involve  risks  and
uncertainties.  The Company's actual results could differ  materially from those
discussed  here.  Factors  that could cause or  contribute  to such  differences
include,  but are not limited to,  those  discussed  in this Item 1, the section
entitled "Additional Risk Factors," and Item 7.

         Caere(R)  Corporation  ("Caere" or the  "Company")  designs,  develops,
manufactures,  and markets optical  character  recognition  ("OCR") software and
hardware for converting  scanned and faxed images into computer  usable text, as
well as desktop electronic forms and information  management products.  For many
applications,  the Company's products provide a low cost accurate alternative to
manual data entry, which is slow, tedious, and error prone.

         In March 1997, Caere acquired Formonix, Inc. ("Formonix"),  a privately
held  corporation that provides  electronic forms products.  The acquisition was
accounted for using the purchase  method of accounting,  and,  accordingly,  the
operating  results of Formonix are included in the  consolidated  results of the
Company since the date of acquisition.

                                 Business Model

         Fiscal  1997  marked the third full year of the  Company's  "bundle and
upgrade"  strategy.  The  Company  previously  shifted to the bundle and upgrade
model to take advantage of the changing dynamics in the OCR marketplace.  In the
past, OCR was primarily a "niche" market characterized by relatively high prices
and  low  unit  volumes.  Today,  driven  by the  increased  power  of  personal
computers,  new scanner  products with  significantly  lower prices,  continuing
improvements in OCR accuracy, and the education of the marketplace, scanning and
OCR solutions are reaching the mainstream.

         Beginning  in the  fourth  quarter  of 1994,  Caere  began to  "bundle"
versions of its  OmniPage(R),  OmniPage  Limited  Edition(TM),  and  WordScan(R)
recognition  products  with scanner  products  from various  manufacturers.  The
Company's  objective in bundling its  products  with  scanners was to expand the
overall  market  for OCR  software  by  providing  a larger  number  of  scanner
purchasers with experience in the advantages of optical  character  recognition.
"Light" versions, with limited capabilities,  are now bundled with a majority of
scanners  being sold.  This  aggressive  seeding of the rapidly  growing base of
scanner  owners has greatly  expanded  the number of Caere  product  users.  The
success of this business model,  compared to Caere's former model of selling its
software primarily at higher prices with lower unit volumes,  will depend upon a
decision by a significant proportion of customers who first receive OCR software
in a bundled  form to upgrade to a newer or more fully  featured  version of the
Company's  software.  Such an upgrade is typically sold at a substantially lower
price than the price of a fully featured, non-upgrade product.

         The Company  shipped  approximately  2,800,000  bundled  units in 1997,
compared  to  approximately  1,800,000  bundled  units in 1996.  The  bundle and
upgrade  business  model  resulted  in a 12  percent  increase  in  revenues  of
Windows-based  OCR software in 1997,  helping to offset a 32 percent  decline in
Macintosh-based OCR revenues during the same time frame. The Company experienced
a 14 percent increase in unit shipments of OCR upgrade products in 1997 compared
to 1996.  Customers  took  advantage of key  improvements  in the  Company's OCR
technology  by  upgrading  to its fully  featured,  flagship  product,  OmniPage
Professional  for Windows 95/NT version 8.0,  which began  shipping in September
1997.  The Company  believes that bundles and upgrades will continue to become a
larger portion of its total revenues and unit sales in the future.

         There can be no assurance  that  Caere's  continued  transition  to the
bundle and upgrade  business  model will be  successful  and provide  sufficient
increases in unit volume in the future to offset  reduced  per-unit  revenue and
gross margin.  In addition,  customers  using the bundled  products may defer or
forego the purchase of Caere's more fully featured  versions of OmniPage if they
find that the bundled product satisfies their recognition needs.


<PAGE>



                                    Products

         The Company offers a product line designed to accommodate the diversity
of  information  and data entry  requirements.  Caere's  products  fall into two
general categories:

         (1)      SOFTWARE: Software products, which accounted for 86 percent of
                  total revenues in 1997, for the information  management market
                  that  offer a range of OCR,  electronic  forms,  and  document
                  management products that provide personal computer users tools
                  to  manage,  intelligently  and  efficiently,  the  documents,
                  images, forms, and faxes that cross their desktops.

         (2)      HARDWARE: Hardware products, which accounted for 14 percent of
                  total  revenues in 1997,  for the data capture  market,  which
                  include bar code  scanners  and OCR  readers  for  transaction
                  processing  applications  such as  high-volume  data entry and
                  check verification. Customers of these products include retail
                  establishments, government agencies, banks, utility companies,
                  and  other   organizations.   Additionally,   the   Millennium
                  Series(R)  provides both  hardware and software  solutions for
                  high-volume, commercial OCR applications.

         Caere's products can be used with a range of computer systems,  such as
IBM,  IBM-compatible,  and Apple Macintosh personal  computers,  as well as most
desktop operating systems, such as Windows, Windows95, Windows NT, and System 7.
Each product is designed to  accomplish  the same overall  goal:  to improve the
speed, accuracy, and simplicity of desktop information management.

Software Products

OmniPage Professional(R)

         Caere's flagship product, OmniPage Professional for Windows and Windows
95 ("OmniPage  Pro(R)"),  is a  customizable,  fully  featured page  recognition
solution.  OmniPage  Pro is designed  for the  scanner  user who needs more than
basic OCR  capabilities.  OmniPage Pro is an OCR product that allows the user to
recognize,  edit, and save complex documents containing text and images in their
original, full-page formats. Using Caere's True Page(R) technology, the user can
edit  graphics  contained on a recognized  page simply by clicking on the image.
OmniPage Pro utilizes a combination of technologies,  including neural networks,
linguistic  analysis,  character experts, and grayscale data to improve accuracy
on degraded documents.

         OmniPage  Professional for Macintosh includes all of the features found
in OmniPage Pro for Windows. It also offers many advanced System 7 capabilities,
including  support of Publish,  which  allow  users to scan a document  once and
electronically publish it to subscribers on a network. The program also supports
Apple Events, which allows other software programs to access OmniPage Pro.

OmniPage Limited Edition

         OmniPage  Limited Edition is a limited feature version of OmniPage that
allows an end user to perform OCR on a scanned document and save the document to
a file.  OmniPage  Limited Edition is bundled with most scanners  offered by the
Company's  scanner  partners.  The  product  is  designed  to allow the  scanner
purchaser to experience the advantages of optical character recognition in order
to encourage the purchaser to upgrade to a fully featured product.

WordScan Plus(TM)

         WordScan Plus is a full featured and accurate page recognition  product
that is sold  primarily to customers of  independent  software  vendors who have
incorporated  Caere's  OCR  technology  into  their  own  application  products.
WordScan Plus integrates  with the most popular  products being used in Windows.
Features  like OLE 2.0  support,  drag and drop  recognition  capability,  and a
Chameleon  Toolbar(TM)  that  automatically  takes  on the  look and feel of the
user's  office  suite  enable  WordScan  Plus to benefit  from  popular  Windows
programs. WordScan Plus directly integrates with all leading office suites, word
processors, electronic mail systems, and facsimile applications.

Recognita Plus(R)

         Recognita  Plus  is  a  leading,  full  featured,   multilingual,   and
font-independent  OCR software  product that  integrates  with most popular word
processing,  desktop  publishing,  and  spreadsheet  applications  available for
Windows.  Recognita Plus includes Self Assertion Technology(TM),  which provides
improved character recognition using a two-step reading process.  Recognita Plus
also  provides OCR training for use on severely  degraded  documents or stylized
typefaces.  The product can also  recognize text in more than 100 languages with
the addition of its Language Enhancement(TM) Package.

PageKeeper(R)

         PageKeeper,  a  document  management  software  solution,  incorporates
leading  technology,  such  as  "weighted  relevance  searching"  and  "document
similarity,"  as  it  examines  the  content  of  the  documents  under  review.
PageKeeper  takes  information from a local hard disk,  network,  or scanner and
creates  a  supercompressed  database  of  both  text  and  images.   PageKeeper
incorporates the OmniPage AnyFont(R)  recognition  capability to convert scanned
documents into computer-literate files automatically.  Because PageKeeper stores
both text and images,  users can electronically file documents in their original
format. Magazine articles with charts and graphs, datasheets with illustrations,
or letters with  signatures  can be stored using minimal disk space.  PageKeeper
automatically  indexes the database,  eliminating  the need to manually index or
assign keywords to the  information.  It presents the results of search requests
in the order of  relevance  to  original  search  requests  using  its  weighted
relevance retrieval feature.

OmniForm(R)

         OmniForm  converts paper forms to electronic  forms with the click of a
button.  Simply scan or fax  documents  into a computer and OmniForm  creates an
electronic  version using some of Caere's OCR technologies.  OmniForm users also
can design their own forms, complete with fonts,  graphics, and logos, using the
custom  toolset  and  Form  Assistant(TM).  In  addition,  OmniForm  allows  for
efficient  completion  and  processing of forms by accepting  input,  performing
calculations, validating entries, and creating databases, which can be searched,
sorted, imported, and exported to popular database applications.

OmniForm Internet Publisher(TM)

         OmniForm  Internet  Publisher is the first  paper-to-electronics  forms
solution for intranets and the Internet.  The product  converts  existing  paper
forms to  electronic  versions,  retaining  and  recognizing  the  various  form
elements  on the  form,  bridging  the  gap  between  the  paper  world  and the
electronic  world.  The product  allows  users to save the forms to a variety of
Web-ready formats  incorporating  such form intelligence as field validation and
calculations,  enabling  companies  to collect  and  distribute  data-associated
business  transactions such as invoices,  purchase orders,  expense reports,  or
questionnaires.

License of Technology

         In  addition  to  the  application   products  described  above,  Caere
continues to license its OCR  technology to a broad range of computer  equipment
manufacturers,  systems integrators,  and developers for inclusion as components
in more complex end-user products,  including document  management and retrieval
systems,  forms processing  systems,  resume screening systems,  and stand-alone
systems.



<PAGE>


         The chart below shows system  requirements  and suggested  retail price
for the Company's significant software products.
<TABLE>

                                            Selected Software Products

<CAPTION>
              Product                                   System Requirements                    Estimated Street Price*
<S>                                  <C>                                                                 <C>

OmniPage Pro - Windows               80386 or above based personal computer, 8 MB RAM, 20                $499
                                     MB disk space, Microsoft Windows 3.1 or later

OmniPage Pro - Mac                   Macintosh computer with 68020 processor or above, 8                 $499
                                     MB RAM, 8 MB disk space, System 7.0 or above

OmniPage Pro - Windows               80386 or above based personal computer, 8 MB RAM, 20                $129
   Retail Upgrade                    MB disk space, Microsoft Windows 3.1 or later

OmniPage Pro - Mac                   Macintosh computer with 68020 processor or above, 8                 $129
   Retail Upgrade                    MB RAM, 8 MB disk space, System 7.0 or above

WordScan Plus - Windows              80386 or above based personal computer, 4 MB RAM, 13                $349
                                     MB disk space, Microsoft Windows 3.1 or later

Recognita Plus - Windows             80386 or above based personal computer, 4 MB RAM, 10                $695
                                     MB disk space, Microsoft Windows 3.1 or later

Recognita Plus - Windows             80386 or above based personal computer, 4 MB RAM, 10                $199
   Retail Upgrade                    MB disk space, Microsoft Windows 3.1 or later

PageKeeper Personal(TM)-               80386 or above based personal computer, 8 MB RAM, 15                $149
   Windows                           MB disk space, Microsoft Windows 3.1 or later

OmniForm - Windows                   80386 or above based personal computer, 8 MB RAM, 8                 $149
                                     MB disk space, Microsoft Windows 3.1 or later

OmniForm - Mac                       Power Macintosh or Macintosh computer with 68020                    $149
                                     processor or above, 12 MB RAM, 10 MB disk space,
                                     System 7.1 or above

OmniForm Internet Publisher          80486 or above based personal computer, 12 MB RAM, 8                $799
                                     MB disk space, Microsoft Windows 95 or NT 4.0 or later
</TABLE>

*  Estimated Street Prices as of March 1, 1998.

     Note:  All Caere  products  support a wide range of output file formats and
scanners.  Output file formats  include,  but are not limited to: Microsoft Word
for Windows,  WordPerfect,  Lotus 1-2-3, and Microsoft Excel. Supported scanners
include, but are not limited to: Hewlett Packard, Microtek, Epson, Apple, Canon,
and Fujitsu.


<PAGE>


Page Recognition Process

         The  process  by which  Caere's  recognition  products  recognize  text
involves  converting  the  electronic  output of a scanner into computer  usable
files through a series of complex  software  algorithms.  The  electronic  image
produced  by the  scanner  is  comprised  of  white or  black  picture  elements
(pixels),  usually 90,000 pixels per square inch,  each rendered to the computer
as a 0 or a 1,  representing  either  a  white  or a  black  pixel.  Before  the
application of  recognition  products such as OmniPage,  a scanner's  electronic
output  could be  displayed  and  manipulated  only as an image on a  computer's
monitor;  the computer did not recognize  that image as a data file usable in an
application program such as a word processor or spreadsheet.

         The graphic  below  illustrates  the process by which  scanned  text or
numeric data is converted into computer  usable form by the Company's  OmniPage,
WordScan, and Recognita products.

                                 (ARTWORK HERE)

         Caere's products  recognize an image in two steps.  First, they analyze
the image of the page to  determine  which parts are text and  numeric  data and
determine the structure of the page layout. Tables,  columns, and paragraphs are
identified  and  located.  They then examine and  identify  the  characters  and
produce  a file  of the  character  data  contained  in  words,  including  page
formatting  information  such as tables,  columns,  paragraphs,  spacing,  bold,
italics,  and underlines that are necessary to allow manipulation of the data as
a text file.

         OmniPage  Pro employs a  combination  of  technologies,  referred to as
Caere's 3D OCR(TM) and AnyFont(TM)  technologies,  to achieve the highest degree
of accuracy on many different types of documents.  OmniPage Pro is the first OCR
product to utilize grayscale  information to analyze  characters the way a human
eye does. Character experts view certain character attributes like a closed loop
or crossed  downward  stroke to identify the unique set of features  inherent in
each  character.  Neural  networks  have been  developed  on powerful  mainframe
computers to "learn" what makes up one character  versus another,  a methodology
known as "feature  recognition."  Caere's page recognition products analyze each
character image according to proprietary algorithms. Feature recognition enables
the OmniPage products to provide the AnyFont  capability that recognizes text in
almost any type style and size.



<PAGE>


Hardware Products

OCR Systems

         Caere has produced  high-quality  handheld and  slot-reader OCR systems
since  1977.  This  line of data  capture  OCR  systems  reads  single  lines of
characters.  These desktop  systems -- consisting of an input device,  such as a
wand, slot-reader or motorized slot-reader, a controller, and an interface cable
-- are  designed for  transaction  processing  applications  that do not require
variable font recognition technology, but demand extremely high accuracy. Common
applications  involve  entering  customer  account  numbers or data from billing
documents into a computer.  Caere's systems accelerate  transaction  processing,
while reducing operator fatigue and key entry errors.

         Caere's 800 Series  Combo  Reader,  which works with a wide  variety of
computers, integrates OCR, bar code, and magnetic stripe reading capabilities in
a single unit. This provides  cost-effective  and versatile  functionality for a
wide range of applications in remittance processing,  banking, and point-of-sale
environments.  The 800 Series is also widely used by  government  organizations,
post offices, and the public utility industry.

         In 1997,  Caere  developed a new series of single-line  OCR readers for
remittance  processing.  Much of the year was  invested in  developing  this new
platform for line scanning that removes some of the limitations of previous line
scanning  products.  The new 5000 Series OCR Line  Readers(TM) read a variety of
common  office fonts and utilize a visible light source to handle print from ink
jet printers. Processing power has increased from an 8-bit processor to a 32-bit
processor, and flash memory will make field upgrades easier. The 5000 Series OCR
Line  Readers  were  introduced  in the fourth  quarter of 1997.  Shipments  are
expected to begin in early 1998.

         A  significant  portion of Caere's  OCR data  capture  business  is the
result of original  equipment  manufacturer (OEM) sales, that is, sales to firms
that purchase  Caere's OCR data capture  technology  and then  integrate it into
their own products.

Bar Code Systems

         Bar code readers  recognize  documents  printed with series of vertical
bars and spaces that represent  data.  They are used in high-volume  transaction
processing  applications,   such  as  point-of-sale   operations,   where  human
readability of data is not necessary.  Bar code systems  tolerate  lower-quality
media than  limited-font OCR systems,  and are typically less expensive than OCR
systems.  Caere's bar code  product  line,  introduced  in 1983,  includes  both
stand-alone  decoders that can be attached  externally to personal computers and
internal  board-level  decoders  used in personal  computers  for cost and space
savings.

         Caere's  bar code  products  cater to the higher end of the market with
feature-rich  decoders and one of the  industry's  first  five-year  warranties.
Caere's  decoders are used in  manufacturing,  retail point of sale,  inventory,
asset tracking,  and myriad  applications where value-added  resellers need more
functionality from bar code readers than just decoding.

         Caere's  Easy-ScannerTM Series bar code systems are decoder/wedges that
can  accommodate   several  input  devices.   With  three  input  ports,   these
decoder/wedges  can accept  input from a bar code  wand,  charge-coupled  device
("CCD"), laser, badge reader, or magnetic stripe reader, and/or serial data from
portable  data  terminals  and scales.  Any data  received  can be filtered  for
acceptance,  then  transmitted,  re-formatted,  or  rejected  to  fit  the  host
application with over 90 built-in data editing  commands.  The Easy-Scanner also
features  multiple output ports to accommodate a variety of interfaces,  such as
RS-232,  parallel,  and keyboard wedge protocols (for simple interfacing to over
450 different types of computers and terminals).

         In 1997, the Company began shipping Model 2014 Network Data  Collection
Terminals.  These easy to integrate terminals provide all the hardware necessary
for a value-added  reseller  ("VAR") to create a simple RS-485  network for shop
floor data collection,  access control, time and attendance,  or work-in-process
tracking.

         The Company partnered with Photographic  Sciences  Corporation ("PSC"),
one of the  industry's  leading bar code laser  manufacturers,  in 1997 to build
Caere's bar code decoding and interfacing technologies into the housing of PSC's
small platform laser scanner for Caere's  distribution.  This partnership  gives
Caere a low cost  laser  scanning  solution  that  keeps  pace  with the  price,
performance,  and size requirements of the industry. Caere introduced Model 1760
Integrated  Laser Scanner in the fourth quarter of 1997.  Shipments are expected
to begin early in 1998.

M/Series II OCR Accelerator Board

         M/Series II OCR  Accelerator  Board is  available  for Windows 3.1x and
Windows 95 PC users. Supported by the M/Series Professional application software
and  through  Caere's  Professional  Developer's  Kit 6.1,  the  M/Series II OCR
Accelerator  Board  converts  images into text at throughput  rates of up to 750
pages per hour,  three times faster than the previous board from Caere. For even
faster  throughput,  multiple  M/Series II OCR Accelerator  Boards can be run in
parallel in the same PC. The M/Series II OCR Accelerator  Board includes the new
M/Text(TM) OCR Engine.

M/Series Professional OCR Server for Windows NT

         M/Series   Professional  OCR  Server  for  Windows  NT  is  a  software
application  that runs on a Windows NT Server  and/or  workstation  and  manages
M/Series Professional's scan, zone, edit, and export functions from Windows 3.1x
and  Windows 95 clients on a network.  Rapid image to text  conversion  (OCR) is
performed on the server,  using highly  accurate  single or multiple  M/Text OCR
software engines.

M/Series Professional Software-Windows 3.1 and Windows 95

         Available  for use with the  M/Series  II OCR  Accelerator  Board,  the
M/Series  Professional  software  allows  users on a network  to  simultaneously
capture  documents,  zone  fields or  templates,  edit text  created  by the OCR
process, and export files to popular output file formats.

Professional Developer's Kit

         Available as a set of DLLs,  VBXs, and OCXs for Microsoft  Visual Basic
and Microsoft Visual C/C++ developers,  the Professional Developer's Kit enables
independent   software   developers  the  ability  to  incorporate  Caere's  OCR
technology into their application products or systems.



<PAGE>


         The  chart  below  shows  typical  applications,   features,  available
interfaces,  and input devices for selected  Caere OCR and bar code  transaction
processing products.
<TABLE>
<CAPTION>

Products          Typical Applications               Features                   Available Interfaces    Input Devices
<S>                <C>                            <C>                              <C>                 <C>

OCR
800 Series         Point of sale                  Reads the following fonts:       Apple Macintosh     Handheld wand
  OCR/Bar          Remittance processing            OCR-A Full                     AT&T                Fixed slot
  Code Combo,      Document control                   Alphanumeric                 Burroughs           Fixed mount
1500 Series        Manufacturing applications       OCR-A Eurobanking              DEC                 CCD scanner
  Document         Hospitals                        OCR-B ECMA11                   IBM                 Magnetic stripe
  Processor        Banking                          OCR-B Eurobanking              IBM PC and          Bar code pen
                   Government                       E13B (MICR)                      compatibles       Badge reader
                   Office file tracking             PostNET                        ITT
                   Postal                         Most one-dimensional bar         Etc. (over 350)
                                                    code symbologies
                                                  Dual-track magnetic stripe
                                                  Fully user programmable

Bar Code
1000 Series,       Manufacturing applications     Reads and autodiscriminates      Apple Macintosh     Wand
1700 Series,       Inventory control                the following symbologies:     AT&T                Slot
2000 Series        Work-in-process tracking         Code 39, Code 128,             DEC                 Laser scanner
                   Shop floor control               Codabar, Interleaved 2 of      IBM                 CCD scanner
                                                  5,
                   Warehousing                      UPC, EAN and MSI               IBM PC and          Magnetic stripe
                   Point of sale                    Plessey                          compatibles       Badge reader
                   Hospital health industry       Fully user programmable          ITT
                   Video cassette rental          Dual-track                       Memorex
                   Government                     Magnetic stripe                  NCR
                   Document tracking                                               UNISYS
                                                                                   Wyse
                                                                                   Etc. (over 300)

</TABLE>

                            Distribution and Support

         Domestically,   the  Company  markets  its  software  products  through
distributors,  including Ingram Micro, Merisel, Tech Data; computer superstores,
such as Best Buy,  CompUSA,  Computer  City,  and  Egghead;  mail order  houses,
including PC Connection,  MicroWarehouse,  and Computer Discount Warehouse;  and
office  superstores,   such  as  OfficeMax  and  Office  Depot.  High-speed  and
integrator products are primarily sold through Law Cypress Distributing Company,
which  works  with  the  Company  to serve  value-added  resellers  and  systems
integrators of imaging products. Accordingly, the Company will be dependent upon
the continued  reliability  and  financial  stability of such  distributors  and
resellers, which are not under the direct control of the Company.

         Sales of software products to Ingram Micro represented approximately 23
percent,  28 percent,  and 22 percent of the Company's net revenues during 1997,
1996, and 1995, respectively.  Should this customer have a significant change in
its  quarterly  buying  pattern or its  financial  condition,  the Company could
experience a material adverse impact on its business and financial  results.  In
addition,  there are  increasing  numbers of companies  competing  for access to
distribution   channels.   Distributors  and  retailers  often  carry  competing
products. Retailers of Caere's products typically have a limited amount of shelf
space and promotional  resources for which there is intense  competition.  There
can be no assurance that distributors and retailers will continue to provide the
Company's products with adequate levels of shelf space and promotional  support.
Failure to do so would have a material  adverse effect on the Company's  results
of operations.

         The  Company  markets  its  transaction  processing  OCR and  bar  code
products primarily through  independent  distributors,  VARs, and hardware OEMs.
The  Company's  agreements  with  OEMs  typically  grant  an OEM  the  right  to
distribute the Company's  products with the OEMs'  microcomputers and other data
collection equipment.  VARs purchase the Company's products and incorporate them
into systems integrated with the products of other manufacturers.

         Internationally,  the Company's products are sold through distributors.
At December 31, 1997, the Company had distributors servicing Western and Eastern
Europe,  Canada,  Australia,  New  Zealand,  South  Korea,  Mexico,  and  Japan.
International  revenues in 1997, 1996, and 1995 were approximately  $18,659,000,
$16,367,000, and $15,154,000, respectively. In most cases, the Company bills its
international  customers  in U.S.  dollars;  therefore,  such  revenues  are not
subject to foreign  currency  fluctuations.  However,  fluctuations  in exchange
rates could affect demand for the Company's  products by causing their prices to
be out of line  with  products  priced  in the  local  currency.  The  Company's
international  revenues are subject to certain risks,  such as export  controls,
import  restrictions,  longer payment cycles,  greater  difficulties in accounts
receivable collections,  and the requirement of complying with a wide variety of
foreign laws.  Although Caere has not previously  experienced  any  difficulties
under foreign law in exporting its products to other countries,  there can be no
assurance  that the Company will not  experience  such  difficulties  in foreign
countries in the future.  Any such  difficulties  would have a material  adverse
effect on the  Company's  international  sales.  The  Company  is not  currently
affected  adversely by such controls or regulations  and is not aware of pending
changes in export  regulations  that would  adversely  affect its  international
business or its ability to collect foreign receivables.

         The Company's agreements with its distributors  generally provide for a
limited right of return,  with the  distributors'  receiving  full credit of the
product's purchase price, less any discounts,  against a purchase order of equal
or greater value.  The Company  monitors its returns and records  provisions for
estimated  returns as shipments are made.  During 1997, 1996, and 1995,  returns
have  represented  2.6  percent,  3.2  percent,  and 3.7  percent  of  revenues,
respectively.  Although Caere believes that it provides adequate  allowances for
returns,  there can be no  assurance  that  actual  returns  will not exceed the
Company's allowances. Any product returns in excess of recorded allowances could
result in a material adverse effect on operating results of the Company.

         The Company has a domestic sales and support staff of  approximately 50
employees  located  throughout  the United  States and a European  sales office,
Caere GmbH, in Munich, Germany. In December 1996, the Company acquired Recognita
Rt., a Hungarian  provider of OCR and forms  software  solutions.  Domestically,
software  product  customers  who register  with the Company  currently  receive
limited hotline technical support and product information at no cost. Additional
technical   support  services  are  available  on  a  "fee  for  support"  basis
thereafter.  Outside of the U.S.,  software product customers  currently receive
technical  support  from a variety of Caere  partners  on a non-fee  basis.  The
Company  warrants to end users that  software  disks are free from media defects
for three months.  OCR and bar code hardware  customers  receive free  telephone
support,  including  assistance  with  installation,  programming,  and  trouble
shooting.  OCR hardware  products  are  warranted  for one year,  while bar code
hardware products are warranted for between one and five years. In addition, the
Company provides  hardware  customers with spare parts and repair services.  OCR
and bar code hardware customers also may purchase annual service contracts under
which the  Company  performs  service  work as needed  for the  duration  of the
service contract.

                                   Competition

         The information  management market is highly competitive and subject to
rapid change along with constant pressure to reduce prices. The Company believes
that the principal  competitive  factors in the software products market include
accuracy, ease of understanding and use, product reliability, tolerance for poor
media, product features and functions,  price/performance characteristics, brand
recognition,  and quality of product  support.  Caere's  competition  within the
microcomputer   software  industry  ranges  from  large  corporations  to  small
independent  software  vendors.   Caere  also  expects  to  encounter  continued
competition, both from established companies and from new companies that are now
developing,  or may develop,  competing  products.  Competition  in the software
products market can be grouped into the following categories:

         The  OmniPage,  WordScan,  and Recognita  families of page  recognition
products contend with competition in two markets. First, several companies offer
packaged OCR application programs through the retail distribution channel. These
include  ScanSoft,  Inc.  ("ScanSoft"),  a division  of Xerox  Corporation,  and
several small, independent software vendors. The Company faces significant price
competition  in the  retail  channel.  The  second  competitive  market  for the
OmniPage family of recognition  products is the OEM and reseller market in which
companies  license OCR  technology to  incorporate  into  different  application
software  products,  or "bundle" the technology with related hardware  products,
such as scanners or fax modems.  Competitors  include ScanSoft and several small
independent  software  vendors.   The  Company  experiences   significant  price
competition  in the OEM market and expects  this to continue.  In addition,  the
"bundled" OCR products  themselves  present  competition to the Company's  fully
featured shrinkwrap product.

         PageKeeper has several direct  competitors  offering competing products
in the growing  desktop  document  management  market.  The  competing  products
include, but are not limited to, PaperPort Deluxe by Visioneer,  Paper Master by
DocuMagix,  Inc., and Pagis by ScanSoft.  In addition,  with  decreasing  prices
driving affordable scanning solutions into the mainstream, Caere expects to face
increasing  competition  in this  product  category  from a variety of  software
developers in the future.

         OmniForm  competes  against  various  products in the electronic  forms
marketplace. In the forms creation segment, where OmniForm's technology takes an
existing paper form and converts it into an electronic version,  OmniForm has no
direct  competition.  In the forms  design and print  segment of the  electronic
forms market, OmniForm competes with products such as Form Tool Gold by IMSI. In
the form filling and submit  segment of the  electronic  forms market,  OmniForm
competes with products  including  JetForm and FormFlow by JetForm  Corporation.
Finally, in the  Internet/intranet  publish and submit segment of the electronic
forms market, OmniForm competes with JetForm by JetForm Corporation.

         The Company  believes  that the  principal  competitive  factors in the
hardware  products market include  accuracy,  tolerance for poor media,  product
features and functions,  and  reliability.  Price is also an important factor in
the bar code market.  The major  competition in the OCR segment of the Company's
hardware  business  is Siemens  CGK.  In the bar code  segment  of the  hardware
business there are numerous competitors, including Symbol Technologies.

         Many of the Company's competitors have substantially greater financial,
marketing,  recruiting, and training resources than the Company. There can be no
assurance  that the Company will be successful  in competing in the  information
management market.

                               Product Development

         The  development  and  enhancement  of the  Company's  OCR and  desktop
document management products have recently absorbed and are expected to continue
to consume the greatest part of the Company's  development  effort.  The Company
believes that it must  continue to upgrade and enhance its existing  products to
ensure that its products remain competitive. The introduction of new or enhanced
products requires Caere to manage the transition from older products. Caere must
manage new  product  introductions  so as to  minimize  disruption  in  customer
ordering  patterns,  avoid excessive  levels of older product  inventories,  and
ensure that adequate  supplies of new products can be delivered to meet customer
demands.  There can be no  assurance  that future  product  transitions  will be
managed successfully by the Company.

         During 1997, 1996, and 1995, research and product development  expenses
were approximately  $9,370,000,  $7,069,000,  and $7,915,000,  respectively.  In
addition to internal  product  development,  the Company  incorporates  software
produced by other companies into its products.  All such incorporation or use is
pursuant to licensing agreements. See also "Product Protection." There can be no
assurance that the research and  development  expenses  incurred will not exceed
development  budgets or that new products  will achieve  market  acceptance  and
generate sales sufficient to offset development costs.

         From time to time,  the  Company  has  experienced  delays  in  product
development and  "debugging"  efforts,  and could  experience such delays in the
future.  Significant  delays  in  developing,  completing,  or  shipping  new or
enhanced  products  could  adversely  affect the  Company's  financial  results.
Furthermore,  as the Company's products become more complex,  development cycles
become  longer and more  expensive.  There can be no assurance  that the Company
will be able to respond  effectively  to  technological  changes or new  product
announcements by others, or that the Company's product  development efforts will
be successful.

                                     Backlog

         The majority of the Company's net revenues in a particular  quarter has
typically  resulted from orders booked in that  quarter.  The Company  considers
backlog to be orders  received  and due to be filled  within six months.  Orders
included  in backlog  typically  may be  canceled or  rescheduled  by  customers
without  significant  penalty.  The Company's  backlog at December 31, 1997, was
approximately   $930,000,   compared  to  backlog  at  December  31,  1996,   of
approximately  $694,000.  Backlog primarily  represents orders for the Company's
hardware  products,  which represented  approximately 14 percent of net revenues
during 1997. There is typically little or no backlog for the Company's  software
products,  as these products ship as soon as orders are received.  Backlog as of
any particular date should not be relied upon as indicative of the Company's net
revenues for any future period.

                           Manufacturing and Suppliers

         The  Company's  manufacturing  operations  for its  OCR  and  bar  code
business  products and its M/Series  Professional  Card Systems consist of final
assembly, test, burn in, and quality control for its systems, subassemblies, and
components.  Components  for  products  are  procured  by the  Company  and then
supplied to third party  contractors.  Many of these  components  are tested and
burned in prior to  delivery  to  contractors  to reduce  failure  rates.  Major
subassemblies such as printed circuit boards are contracted to third parties for
assembly and initial testing.

         Most  of the  components  used  in  the  manufacture  of the  Company's
products are available from multiple sources of supply.  Certain components used
in the  manufacture  of the Company's OCR products are currently  available only
from a single source.  Although the Company generally  maintains a several-month
inventory  level of these  components,  failure of a  single-source  supplier to
deliver  required  quantities of such materials  could  materially and adversely
affect the Company's operating results. The Company believes that, if necessary,
it could develop  alternative  sources of supply for these components and parts,
or re-engineer the products.  However, any delays in developing such alternative
sources of supply or in the re-engineering of the products could have a material
adverse effect on the Company's results of operations.

                               Product Protection

         The  Company  relies  upon  proprietary   technology,   trade  secrets,
know-how,  continuing  technological  innovations and licensing opportunities to
maintain  its  competitive  position.   The  Company  attempts  to  protect  its
technology,  and trade  secrets  with  patents,  copyrights,  trade secret laws,
technical measures,  and non-disclosure  agreements.  The Company's policy is to
file patent and copyright  applications to protect technology,  inventions,  and
improvements that are important to the development of its business.  The Company
has been  issued a series of  patents  which  directly  relate to its  products.
Assurance cannot be given,  however, that any patents issued to the Company will
not be challenged,  invalidated,  or  circumvented or that the rights granted by
the patents will provide competitive advantages to the Company.

         In order to protect its ownership rights in its software products,  the
Company  licenses such products to OEMs and resellers on a  non-exclusive  basis
with    contractual    restrictions   on   reproduction,    distribution,    and
transferability.  In addition,  the Company  generally  licenses its software in
object code form only. The Company  licenses its software  products to end users
by use of a  "shrink-wrap"  customer  license  that  restricts  the end  user to
personal use of the product. Despite these contractual  restrictions,  it may be
possible  for  competitors  or users to  illegally  copy the  software or obtain
information which the Company regards as proprietary.

         The Company also relies on trade secrets and proprietary know-how.  The
Company  has been,  and will  continue to be,  required  to  disclose  its trade
secrets and  proprietary  know-how to employees  and  consultants.  Although the
Company seeks to protect its trade secrets and proprietary  know-how by entering
into  confidentiality  agreements  with such persons,  there can be no assurance
that these  agreements  will not be  breached,  that the  Company  would have an
adequate  remedy for any breach,  or that the  Company's  trade secrets will not
otherwise become known or be independently discovered by competitors.

         Because of  technological  developments  in the  industry  in which the
Company  markets its  products,  it is possible  that  certain of the  Company's
products  may infringe  third party  proprietary  rights.  From time to time the
Company  has  received,  and in the  future  may  receive,  notices of claims of
infringement.  In  response  to these  claims,  the  Company  may have to obtain
licenses for an allegedly infringing product or stop selling such product and be
liable for damages.  There can be no  assurances  that any required  licenses or
rights could be obtained on commercially reasonable terms.

         In addition,  Caere has developed products in the past that incorporate
technology based on licenses received from third parties.  The Company's ability
to continue to develop and  commercialize  its products  will be affected by its
ability to renew existing  technology licenses and to obtain technology licenses
from third  parties in the future.  There can be no  assurance  that the Company
will be able to renew its current  licenses or obtain any necessary  licenses in
the future.  The failure to renew  existing  licenses or to obtain any  licenses
that may be required in the future could have a material  adverse  effect on the
Company.

         Policing unauthorized use of technology is difficult, especially in the
software  industry.  Software piracy can be expected to be a persistent  problem
for the  software  industry  for the  foreseeable  future.  Such  piracy  can be
particularly egregious in international markets in which the Company distributes
its products.  The Company believes that, due to the rapid pace of technological
change in the industry,  factors such as knowledge,  ability,  frequent  product
enhancements,  timeliness and quality of product support,  and the experience of
the Company's employees are more significant as a means to protect the Company's
competitiveness than patent, copyright, and trade secret protection.

                                    Employees

         As of  December  31,  1997,  Caere  employed  293  people.  None of the
Company's employees is represented by a labor union. The Company has experienced
no work stoppages and believes that its employee relations are good. The Company
has utilized  the services of  consultants,  third-party  developers,  and other
vendors extensively in its sales, development, and manufacturing activities.

         Competition  in the  recruiting  of  personnel in the computer and data
recognition  industry is intense.  The Company  believes that its future success
will  depend  in part on its  continued  ability  to hire and  retain  qualified
management,  marketing and technical  employees,  and  independent  contractors.
There can be no  assurance  that the Company  will be able to attract and retain
enough qualified  employees.  Caere does not carry any key person life insurance
with respect to any of its personnel.

                             Additional Risk Factors

Fluctuating Revenues and Operating Results

         Caere's revenues and operating results have fluctuated in the past, and
the Company's  future revenues and operating  results are likely to do so in the
future, particularly on a quarterly basis.

         Caere's experience has been that a disproportionately  large percentage
of  shipments  has  occurred in the third month of each fiscal  quarter and that
shipments  tend to be  concentrated  in the latter half of that  month.  Backlog
early in a quarter is generally  not large enough to assure that Caere will meet
its revenue target for any particular  quarter.  A shortfall in shipments at the
end of any particular  quarter may cause the operating  results for that quarter
to fall significantly short of anticipated levels.

         The Company's quarterly operating results may continue to fluctuate due
to numerous  other  factors.  Some of these  factors  include the demand for the
Company's products, seasonality, customer order deferrals in anticipation of new
versions of the Company's products, the introduction of new products and product
enhancements by the Company or its competitors, including the effects of filling
the distribution  channels  following such introductions and of potential delays
in  availability  of announced or  anticipated  products,  price  changes by the
Company or its  competitors,  product  sales  mix,  timing of  acquisitions  and
associated costs, and timing of significant marketing and sales promotions.

Lack of Product Revenue Diversification

         Caere derived  approximately  72 percent of sales in 1997 and 1996 from
the OmniPage and WordScan line of products.  Caere  expects that these  software
products will  continue to account for a majority of the Company's  sales in the
future.  A decline  in demand  for these  products  as a result of  competition,
technological  change,  or other factors would have a material adverse effect on
the Company's results of operations.

Mature Markets for Certain OCR Products

         For fiscal years ended December 31, 1997, 1996, and 1995, Caere derived
approximately 13 percent, 14 percent, and 16 percent,  respectively,  of its net
revenues from sales of its transaction processing OCR and bar code products. The
market for both of these sets of  products is  relatively  mature and may not be
subject to growth or  expansion  in the  future.  Moreover,  mature  markets are
typically  characterized by severe price competition.  There can be no assurance
that Caere's hardware-based  transaction processing products will continue to be
a significant source of revenues or profitability for the Company.

Possible Volatility of Caere Stock Price

         The prices for Caere's Common Stock have fluctuated widely in the past.
The management of Caere believes that such  fluctuations may have been caused by
announcements  of  new  products,  quarterly  fluctuations  in  the  results  of
operations,  and other  factors,  including,  but not  limited  to,  changes  in
conditions  of the personal  computer  industry in general.  Stock  markets have
experienced  extreme price volatility in recent years. This volatility has had a
substantial  effect on the market prices of securities issued by Caere and other
high  technology  companies,  often  for  reasons  unrelated  to  the  operating
performance of the specific  companies.  Caere anticipates that prices for Caere
Common Stock may continue to be volatile. Such future stock price volatility for
Caere's Common Stock may provoke the initiation of securities litigation,  which
may divert substantial  management resources and have an adverse effect on Caere
and on the Company's results of operations.

Effect of Antitakeover Provisions of Delaware Law and Caere's Charter Documents

         Caere  is a  corporation  organized  under  the  laws of the  state  of
Delaware.  Certain  provisions of Delaware  General  Corporation  Law ("Delaware
Law"),  and the  charter  documents  of Caere may have the  effect of  delaying,
deferring,  or preventing  changes in control or  management of Caere.  Caere is
subject to the  provisions  of Section 203 of the  Delaware  Law,  which has the
effect of  restricting  changes in control of a company.  In  addition,  Caere's
Board of Directors is divided into three  separate  classes.  Caere's  Board has
authority  to issue up to  2,000,000  shares of  Preferred  Stock and to fix the
rights, preferences,  privileges, and restrictions,  including voting rights, of
such shares without any further vote or action by its  stockholders.  Caere also
has a Preferred Share Rights Plan (the "Shareholder Rights Plan"). The effect of
the antitakeover  protections of the Delaware Law, the Caere charter  documents,
and the  Shareholder  Rights Plan could be to make it more difficult for a third
party to acquire,  or could discourage a third party from acquiring,  a majority
of the outstanding stock of Caere.

 Item 2. PROPERTIES.

         The Company's principal administrative,  marketing,  manufacturing, and
product  development  facilities consist of approximately  56,000 square feet in
two buildings in Los Gatos, California.  The Company occupies this space under a
lease agreement that expires in 2002. In addition, the Company leases office and
storage  space in four  locations  in the United  States for use by its regional
field sales and support  staff.  Caere GmbH also leases  office space in Munich,
Germany,  for its operations,  while Recognita  leases office space in Budapest,
Hungary.  The Company believes that its existing facilities are adequate for its
needs for at least the next twelve months.

Item 3.  LEGAL PROCEEDINGS.

         The Company is involved in certain  claims arising in the normal course
of business.  The extent to which these matters will be pursued by the claimants
or  the  eventual  outcome  is  not  presently  determinable.  However,  Company
management,  after review and consultation with the Company's counsel,  believes
that the ultimate  resolution of these matters will not have a material  adverse
effect on its consolidated financial position or results of operations.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.


                                                      PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         Incorporated  by reference to the section of the Company's  1997 Annual
Report to Stockholders entitled "Quarterly Results of Operations," page 32.

Item 6.  SELECTED FINANCIAL DATA.

         Incorporated  by reference to the section of the Company's  1997 Annual
Report to Stockholders entitled "Financial Highlights," page 2.

     Item 7.  MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION AND
RESULTS OF OPERATIONS.

         Incorporated  by reference to the section of the Company's  1997 Annual
Report to Stockholders entitled "Management's Discussion and Analysis," pages 16
through 20.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         Incorporated  by reference to the sections of the Company's 1997 Annual
Report to Stockholders entitled "Financial Statements," pages 21 through 32.

         Supplementary  data  for the  year  ending  December  31,  1996,  is as
follows:
<TABLE>

QUARTERLY RESULTS OF OPERATIONS (Unaudited)
<CAPTION>
                                                                                                             Year
(In thousands, except per share data)                                          1996, Quarter Ended
                                                Mar 31         Jun 30         Sep 30       Dec 31     Dec 31, 1996
<S>                                            <C>            <C>            <C>          <C>              <C>

Net revenues                                   $13,556        $13,989        $13,403      $13,580          $54,528
Gross margin                                     9,241          9,532          9,130       10,152           38,055
In-process research and development                 --             --             --        4,373            4,373
Write-down of investment in ZyLAB                   --             --             --        2,616            2,616
Earnings (loss) before income taxes              1,609          1,844          1,691      (4,648)              496
Net earnings (loss)                              1,300          1,475          1,522      (3,901)              396
Net earnings (loss) per share                     $.10           $.11           $.11       $(.31)             $.03
Shares used in per share calculations           13,459         13,820         13,342       12,596           13,319

Common stock price per share:
   High                                          $9.00         $13.38         $12.50       $11.50           $13.38
   Low                                            6.63           8.63           8.00         7.63             6.63
</TABLE>

     Item 9. CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

         None.

                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

          Incorporated by reference to the sections of the Company's  definitive
proxy  statement for the 1998 Annual Meeting of  Stockholders to be held May 13,
1998, entitled "Election of Directors" and "Management."

Item 11.  EXECUTIVE COMPENSATION.

         Incorporated  by reference to the sections of the Company's  definitive
proxy statement for the 1998 Annual Meeting of Stockholders  entitled "Executive
Compensation,"  "Compensation  of Directors," and "Compliance with Section 16(a)
of the Securities Exchange Act of 1934."

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Incorporated  by reference to the section of the  Company's  definitive
proxy statement for the 1998 Annual Meeting of Stockholders  entitled  "Security
Ownership of Management and Principal Stockholders."

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Incorporated  by reference to the section of the  Company's  definitive
proxy statement for the 1998 Annual Meeting of Stockholders  entitled "Executive
Compensation,"  "Compensation  of  Directors,"  and  "Stock  Option  Grants  and
Exercises."

                                     PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)       1.      Index to Financial Statements
<TABLE>

                  The following  documents are  incorporated  in Part II of this
         Annual Report by reference to the 1997 Annual Report to Stockholders:
<CAPTION>

                                                                                                   Annual Report to
                                                                                                     Stockholders
           <S>                                                                                         <C>
           Consolidated Balance Sheets as of December 31, 1997 and 1996                                Page 21
           Consolidated Statements of Earnings for each of the years in the three-year
              period ended December 31, 1997                                                           Page 22
           Consolidated Statements of Stockholders' Equity for each of the years in the
              three-year period ended December 31, 1997                                                Page 23
           Consolidated Statements of Cash Flows for each of the years in the
              three-year period ended December 31, 1997                                                Page 24
           Notes to the Consolidated Financial Statements                                              Pages 25-32
           Independent Auditors' Report                                                                Page 32
</TABLE>

                  With the exception of the information  expressly  incorporated
         by reference into Items 5, 6, 7, and 8 of this Annual Report,  the 1997
         Annual Report to Stockholders,  attached as Exhibit 13.1, is not deemed
         filed as part of this report.


         2.       Financial Statement Schedules

                  The following  financial statement schedule is filed as a part
         of this  Annual  Report  and  should  be read in  conjunction  with the
         Financial Statements:

         Schedule II - Valuation and Qualifying Accounts

                  All other schedules are omitted because they are not required,
         or not applicable,  or because the required  information is included in
         the 1997 Annual Report to Stockholders, filed as Exhibit 13.1.
<TABLE>

         3.       Exhibits
<CAPTION>
      Exhibit
      Number                 Description
           <S>        <C>
           2.1        Agreement and Plan of  Reorganization  dated as of October 14, 1994,  between the Company and
                      Calera Recognition Systems, Inc. (5)
           3.1        Certificate of Incorporation of the Company. (1) (exhibit 3.4)
           3.1(i)     Certificate of Amendment filed with the Delaware Secretary of State October 13, 1994. (6)
           3.1(ii)    Agreement  of Merger  between  the  Caere  Acquisition  Corporation  and  Calera  Recognition
                      Systems,  Inc.  as filed with the  California  Secretary  of State  December  20,  1994.  (6)
                      (exhibit 3.5)
           3.2        By-laws of the Company. (1) (exhibit 3.5)
           4.1        Reference is made to Exhibits 3.1 and 3.2.
          *10.1       1981  Incentive  Stock Option Plan,  as amended,  and related form of incentive  stock option
                      agreement. (4) (exhibit 10.1)
          *10.2       1981  Supplemental  Stock Option Plan,  as amended,  and related form of  supplemental  stock
                      option agreement. (4) (exhibit 10.2)
           10.3       Lease  Agreement  for 100 Cooper  Court,  dated  November 27,  1991,  between the Company and
                      Vasona Business Park. (7)
           10.4       Lease  Agreement  for 104 Cooper  Court,  dated  November 27,  1991,  between the Company and
                      Vasona Business Park. (7)
           10.5       Form of  Indemnity  Agreement  between  the  Company  and its  officers  and  directors.  (1)
                      (exhibit 10.12)
          *10.7       Employee Stock Purchase Plan. (2) (exhibit 10.15)
          *10.8       1992 Officer Bonus Plan. (4) (exhibit 10.9)
          *10.9       1992 Non-Employee Directors' Stock Option Plan. (4) (exhibit 10.10)
           10.10      Preferred Share Purchase Rights Plan. (3) (exhibit 1)
          *10.11      Executive  Compensation  and  Benefits  Continuation  Agreement,   Robert  G.  Teresi,  dated
                      December 28, 1994. (6)
           11.1       Statement regarding computation of net earnings (loss) per share.
           13.1       1997 Annual Report to Stockholders.
           21.1       Subsidiaries of the Company.
                23.1   Consent of KPMG Peat Marwick LLP.
           24.1       Power of Attorney.  Reference is made to page 18.

         * Management contract or compensatory plan or arrangement.
</TABLE>



<PAGE>


      (1)  Incorporated by reference to the  corresponding or indicated  exhibit
           to the Company's Registration Statement on Form S-1, as amended (File
           No. 33-30842).
      (2)  Incorporated  by  reference  to  the  corresponding  exhibit  in  the
           Company's  Form 10-K Annual Report for the fiscal year ended December
           31, 1990.
      (3)  Incorporated  by reference to the indicated  exhibit in the Company's
           Form 8-K Current Report filed on April 18, 1991.
      (4)  Incorporated by reference to the  corresponding or indicated  exhibit
           to the  Company's  Form 10-K Annual  Report for the fiscal year ended
           December 31, 1991.
      (5)  Incorporated by reference to Caere's  Registration  Statement on Form
      S-4  (File  No.   33-85840).   (6)   Incorporated   by  reference  to  the
      corresponding or indicated exhibit to the Company's Form 10-K Annual
           Report for the fiscal year ended December 31, 1994.
      (7)  Incorporated by reference to the  corresponding or indicated  exhibit
           to the  Company's  Form 10-K Annual  Report for the fiscal year ended
           December 31, 1995.

 (b)       Reports on Form 8-K.

           None.


<PAGE>



                                   SIGNATURES


         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange  Act of 1934,  the  Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                CAERE CORPORATION



Dated: March 25, 1998                           By:  /S/Blanche M. Sutter
                                                     Blanche M. Sutter
                                                     Executive Vice President,
                                                     Chief Financial Officer and
                                                     Secretary

                                POWER OF ATTORNEY

         KNOW  ALL MEN BY THESE  PRESENTS,  that  each  person  whose  signature
appears below  constitutes  and appoints Robert G. Teresi and Blanche M. Sutter,
or  either  of  them,  his or her  attorney-in-fact,  each  with  the  power  of
substitution,  for him or her, in any and all capacities, to sign any amendments
to this Report,  and to file the same, with exhibits thereto and other documents
in connection  therewith,  with the Securities and Exchange  Commission,  hereby
ratifying and confirming all that each of said attorneys-in-fact,  or his or her
substitute or substitutes, may do or cause to be done by virtue hereof.

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

Signature                                       Title                                 Date
<S>                                   <C>                                         <C>

/S/Robert G. Teresi                   Chairman of the Board,                      March 25, 1998
Robert G. Teresi                      Chief Executive Officer
                                      (Principal Executive Officer)

/S/James K. Dutton                    Director                                    March 25, 1998
James K. Dutton

/S/Robert J. Frankenberg              Director                                    March 25, 1998
Robert J. Frankenberg

/S/Blanche M. Sutter                  Executive Vice President,                   March 25, 1998
Blanche M. Sutter                     Chief Financial Officer and Secretary
                                      (Principal Financial and Accounting Officer)


</TABLE>

<PAGE>








                                                                  EXHIBIT 11.1
<TABLE>

                                CAERE CORPORATION
                      ------------------------------------
                         STATEMENT REGARDING COMPUTATION
                            OF NET EARNINGS PER SHARE
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


  <CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                    ----------------------------------------------
<S>                                                       <C>            <C>            <C>
                                                          1997           1996           1995
                                                    ----------------------------------------------

                                                    ----------------------------------------------

Net earnings                                                 $3,140           $396         $2,397
                                                    ==============================================



Weighted average common shares outstanding for
basic earnings per share calculation                         13,123         13,120         13,172

   Effect of dilutive common equivalents
      shares - stock options outstanding                        142            199            366

Weighted  average  common  shares and  dilutive
common  equivalent  shares outstanding for diluted  ==============================================
earnings per share calculation                               13,265         13,319         13,538
                                                    ==============================================


Basic earnings per share                                      $0.24          $0.03          $0.18
                                                    ==============================================

Diluted earnings per share                                    $0.24          $0.03          $0.18
                                                    ==============================================
</TABLE>


There were no reconciling items in the numerators  between the basic and diluted
earnings  per share  computations.  Options  excluded  from the  computation  of
earnings per share because their effect on earnings per share was  antidilutive,
but which could  dilute  basic  earnings  per share in future  periods,  were as
follows: 564 in 1997, 26 in 1996, and 84 in 1995.



<PAGE>


                                  EXHIBIT 21.1




                              LIST OF SUBSIDIARIES


                           Caere FSC Corporation, Guam

                               Caere GmbH, Germany

                             Recognita Rt., Hungary

                            Formonix, Inc., Colorado


<PAGE>



                                  EXHIBIT 23.1

                     REPORT ON FINANCIAL STATEMENT SCHEDULE
                       AND CONSENT OF INDEPENDENT AUDITORS




The Board of Directors and Stockholders
Caere Corporation:

The audits  referred to in our report  dated  January  26,  1998,  included  the
related  consolidated  financial statement schedule for each of the years in the
three-year period ended December 31, 1997, included in the annual report on Form
10-K. This consolidated  financial  statement  schedule is the responsibility of
the Company's  management.  Or  responsibility  is to express an opinion on this
consolidated  financial  statement schedule based on our audits. In our opinion,
such consolidated  financial statement schedule,  when considered in relation to
the basic consolidated  financial statements taken as a whole,  presents fairly,
in all material respects, the information set forth therein.

We consent to incorporation  by reference in the  registration  statements (Nos.
33-35033,  33-49114, 33-32992, 33-66430, 33-81708, 33-87824, 33-81680, 33-60027,
333-02293,  33-10803, 333-30993, and 333-31019) on Form S-8 of Caere Corporation
of our reports  dated  January 26, 1998,  relating to the  consolidated  balance
sheets of Caere  Corporation and  subsidiaries as of December 31, 1997 and 1996,
and the related consolidated  statements of earnings,  stockholders' equity, and
cash flows for each of the years in the  three-year  period  ended  December 31,
1997,  and the related  schedule,  which reports appear or are  incorporated  by
reference  in the  December  31,  1997,  annual  report  on Form  10-K of  Caere
Corporation.




                                                       KPMG Peat Marwick LLP

Mountain View, California
March 24, 1998




<PAGE>
<TABLE>


<CAPTION>
                                CAERE CORPORATION
INDEX OF EXHIBITS

         <S>          <C>
         Exhibit
         Number       Description
         2.1          Agreement and Plan of Reorganization dated as of October 14, 1994,
                      between the Company and Calera Recognition Systems, Inc. (5)(exhibit 2.01)
         3.1          Certificate  of  Incorporation  of the Company.  (1)(exhibit  3.4)
         3.1(i)       Certificate of Amendment  filed with the Delaware  Secretary of State
                      October 13, 1994. (6)
         3.1(ii)      Agreement of Merger between the Caere Acquisition Corporation and
                      Calera Recognition Systems, Inc. as filed with the California Secretary
                      of State December 20, 1994. (6)
         3.2          By-laws of the Company. (1)(exhibit 3.5)
         4.1          Reference is made to Exhibits 3.1 and 3.2.
        *10.1         1981 Incentive Stock Option Plan, as amended, and related form of
                      incentive stock option agreement. (4)(exhibit 10.1)
        *10.2         1981 Supplemental Stock Option Plan, as amended, and related form of
                      supplemental stock option agreement. (4)(exhibit 10.2)
         10.3         Lease Agreement for 100 Cooper Court, dated November 27, 1991,
                      between the Company and Vasona Business Park. (7)(exhibit 10.3)
         10.4         Lease Agreement for 104 Cooper Court, dated November 27, 1991,
                      between the Company and Vasona Business Park. (7)(exhibit 10.4)
         10.5         Form of Indemnity Agreement between the Company and its officers
                      and directors. (1)(exhibit 10.12)
        *10.7         Employee Stock Purchase Plan. (2)(exhibit 10.15)
        *10.8         1992 Officer Bonus Plan. (4)(exhibit 10.9)
        *10.9         1992 Non-Employee Directors' Stock Option Plan. (4)(exhibit 10.10)
         10.10        Preferred Share Purchase Rights Plan. (3)(exhibit 1)
         10.11        Executive Compensation and Benefits Continuation Agreement,
                      Robert G. Teresi, dated December 28, 1994. (6)
         11.1         Statement regarding computation of net earnings (loss) per share.
         13.1         1997 Annual Report to Stockholders.
         21.1         Subsidiaries of the Company.
         23.1         Consent of KPMG Peat Marwick LLP.
         24.1         Power of Attorney.  Reference is made to page 18.
</TABLE>

         * Management contract or compensatory plan or arrangement.

      (1)  Incorporated by reference to the  corresponding or indicated  exhibit
           to the Company's Registration Statement on Form S-1, as amended (File
           No. 33-30842).
      (2)  Incorporated  by  reference  to  the  corresponding  exhibit  in  the
           Company's  Form 10-K Annual Report for the fiscal year ended December
           31, 1990.
      (3)  Incorporated  by reference to the indicated  exhibit in the Company's
           Form 8-K Current Report filed on April 18, 1991.
      (4)  Incorporated by reference to the  corresponding or indicated  exhibit
           to the  Company's  Form 10-K Annual  Report for the fiscal year ended
           December 31, 1991.
      (5)  Incorporated by reference to Caere's  Registration  Statement on Form
      S-4  (File  No.   33-85840).   (6)   Incorporated   by  reference  to  the
      corresponding or indicated exhibit to the Company's Form 10-K Annual
           Report for the fiscal year ended December 31, 1994.
      (7)  Incorporated by reference to the  corresponding or indicated  exhibit
           to the  Company's  Form 10-K Annual  Report for the fiscal year ended
           December 31, 1995.



<PAGE>


<TABLE>

                                CAERE CORPORATION
                                   SCHEDULE II
                                 ---------------
                        VALUATION AND QUALIFYING ACCOUNTS
                                December 31, 1997

                                 (In Thousands)

<CAPTION>
                                                                 Additions
                                                           ---------------------------------
                                                Balance at     Charged to       Charged                      Balance
                                                 Beginning      Costs and      To Other                    at End of
                  Description                    of Period       Expenses      Accounts    Deductions         Period


<S>                                                 <C>            <C>       <C>               <C>            <C>

Year Ended December 31, 1995
  Allowance for returns, coop advertising
      and other customer credits                    $2,273         $1,828    $                 $2,399         $1,702
                                                                                     --
                                            =========================================================================


  Accumulated amortization of
    software development costs                      $2,730           $683    $             $       --         $3,413
                                                                                     --
                                            =========================================================================



Year Ended December 31, 1996
  Allowance for returns, coop advertising
      and other customer credits                    $1,702         $1,578    $                 $1,765         $1,515
                                                                                     --
                                            =========================================================================


  Accumulated amortization of
    software development costs                      $3,413           $734    $             $       --         $4,147
                                                                                     --
                                            =========================================================================



Year Ended December 31, 1997
  Allowance for returns, coop advertising
      and other customer credits                    $1,515         $2,189    $                 $1,617         $2,087
                                                                                     --
                                            =========================================================================


  Accumulated amortization of
    software development costs                      $4,147           $508    $             $       --         $4,655
                                                                                     --
                                            =========================================================================

</TABLE>